US Dollar Outlook – Strong GDP Lifts Dollar Despite Storm Impact

Storm Impacts Are A Net Positive

The first estimate for US 3rd quarter GDP came in hotter than expected despite fears hurricane impact could dampen growth. At 3.0% the estimate is 0.3% better than expected and driven on rising inventories and international trade. This read puts the US on track for 2.5% annualized growth in 2017 and above expectations. It also helps cement the idea that negative impacts from the hurricanes was limited, short lived and likely a net positive for the economy going forward. Based on yesterday’s jobless claims data labor markets at least have not only recovered from the storms but improved in the last month.

Headline GDP came in at 3.0% on broad improvement within the economy. The report shows growth in PCE, inventories, business investment, exports and government spending partially offset by declines in residential investment and local/state government spending. Imports, which are a drag on GDP, fell adding additional lift as US manufacturing expands. The real news though is the increase in price inflation, an increase that will likely weigh on the minds of FOMC members. The price index for gross domestic purchases jumped 1.8%, double its increase in the previous quarter, and dangerously close to the Fed’s 2% target inflation rate. The PCE price index came in at 1.5%, 5X higher than it was just a quarter ago.

Market Outlook

In terms of the FOMC, rate hike expectations and the dollar this data is bullish. There is still little to no expectations for a rate hike at the meeting next week but expectations for the December hike have risen to near 100% with growing expectation for another interest rate hike early in 2018. This news has helped to strengthen the dollar and drive it to new highs versus the basket of world currencies. The EUR/USD was already moving lower on the ECB statement and extended those losses to a 3 month low. The ECB has indicated dovishness and relaxed its stance on tapering while US data continues to support rate hikes, a situation that means diverging policy and a stronger dollar.

The USD/CAD is also moving on the US GDP data. Earlier in the week the BOC indicated a less hawkish stance than expected, weakening the Loony and setting the pair up for an extended move higher. Friday’s action saw it extend a break above resistance with an eye on targets near 1.3000 and it is likely to spark some big moves. The risk is that the bank will only be as expected, or perhaps less than expected, when it comes to their inflation outlook and timeline for rate hikes. If this happens there is a chance the dollar could correct versus the Euro, the Loony and other major world currencies.